Authoritarian Audacity Is Going To Crash

I don't know what it is like in your neighborhood, but Vancouver, where I
live, is plagued by a number of critters. There are urban bears, urban coyotes,
urban raccoons, urban skunks and urban socialists. Of course, the audacity
and ambitious schemes of the latter have done the most harm. In touting they
can manage the economy and the climate - audacity has been pushed to the limit
and is running into a wall of common sense. The public can sense the beginning
of policy failure and can initiate significant political reform. It has done
it before.

Under various compelling arguments the state has imposed its authority in
a manner unseen in four hundred years. Since the early 1900s the main pitch
has been that economic central planning has been needed for the public good.
Eastern Europe got Marx. The Western World got Keynes. However, as marked by
the fall of the Berlin Wall in 1989, folks who had suffered from too much central
planning began throw it off. Political reform swept the world and in the 1990s
many hard-line socialists slipped into the environmental movement. Within this,
man-caused global warming has been a powerful ploy in imposing authority and
in academe - harvesting grant money.

Any impartial review of history would conclude that the notion that an economy
is national and can be managed by manipulating interest rates has been some
form of madness. More specifically, financial history itself is a "due diligence" on
every wild scheme ever floated - that's in the markets as well as by financial
adventurers in public policy.

Modern markets and central banking developed in the late 1600s. There has
been only one financial history and the basic pattern has been a long expansion,
a speculative asset inflation culminating in a blow-off. This has been followed
by a long contraction. Then it repeats.

My address to the Spring Dinner was titled "Great Depressions Are So Methodical" and
it reviewed that the action in the curve and credit spreads has been the same
on the way up each mania, the same on the transition from boom to the initial
panic, and then the same on the lengthy contraction. In a yet to be published
paper I've shown that governments essentially do the same things during the
boom, which has been swanning around taking credit for the apparent prosperity.
Then they take measures to prevent the initial crisis, and then turn to scapegoats
and protectionism.

The concept of throwing credit at a credit contraction and hoping it will
go away has been floated on every severe crisis since the 1618 crash. The esteemed
Walter Bagehot argued it elegantly when he was editor of The Economist in 1873.
That year's collapse of a great bubble marked the beginning of long contraction
that in 1884 prompted the first usage of the term "Great Depression". The long-running
contrast between academics and the markets has been one of the best generators
of irony in history. The contraction lasted from 1873 to 1895, but as late
as 1939, top economists such as Rostow, were still analyzing it as the "Great
Depression".

Recently, leading experts have declared that certain manipulations have prevented "Great
Depression 2.0" from happening. From their own literature such economists should
know that it would be the third one. History counts that the one that started
in 1929 was number five in the series.

It is worth emphasizing that the Fed was given the unique privilege of a "flexible" currency
in order to prevent bad things from happening. Of course, the 1929 Crash was
impossible so an even better agency was needed.

Two important acts were passed that were designed to prevent another run-a-way
bubble.

One of the promoter-politicians boasted that the SEC would put a "cop
at the corner of Wall and Broad Streets". The SEC did not prevent
another bubble and it did not shut down the biggest Ponzi Scheme when advised
of it some years before Madoff failed.

Glass-Steagall was taken off the books to belatedly bless the existing move
by commercial banks into Wall Street. But then at the culmination of a financial
mania it has been essential to have all institutions involved, which is another
example of policymakers repeating their own history. As Lord Overstone observed "No
warning can save a people determined to suddenly grow rich".

It seems that the combination of the late great boom and its visions of Goldilocks
has been accompanied by the equivalent bubble in authoritarian politics. Both
are vulnerable to powerful post-bubble forces. For example, the rallying cry
of the American Revolution was about taxes and the heavy hand of government.
The preceding long expansion and concluding bubble blew out in 1772. Similar
revulsion for the authoritarian White House is developing. As this contraction
continues Democrat bullies will become even more isolated from the electorate.

Researchers should not dwell on the notion that throwing credit around is
a good thing, or explaining why it wasn't successful in 1929, or boasting that
this time it has worked. Before building any theory on financial markets it
is essential to review just how a mania turns to bust.

Typically, the boom runs some 12 to 16 months against an inverted yield curve.
What's more, rising interest rates is an indicator that the boom is on. The
worry should begin when short-dated rates, such as treasury bills, start to
decline. Short rates fall through most of the initial liquidity crisis. For
example, the key administered rate declined from 6% in 1929 to 1.5% in 1930,
or 450 basis points. Much later, scholars insisted that the Fed wasn't aggressive
enough in cutting rates. In the post-1873 bust the Bank of England dropped
the rate from 9% to 2.5% and 650 bps was not enough to prevent that Great Depression.
Just like their concepts on credit - the notion that lowering interest rates
will re-ignite a boom is right out of thin air.

If they had cut them to zero would it have made any difference? It's doubtful
because high interest rates accompany a boom and low ones accompany contractions.
Throughout its history the senior central bank has followed the big changes
in market rates of interest.

On our market debacle, the curve was expected to reverse to steepening by
June 2007, which was the critical sixteenth month. It reversed in that fateful
May, and as the saying goes - the rest is history. This proved again that the
Fed has virtually no influence on the curve or on spreads and these have been
some of the best indicators of a developing contraction.

Credit deteriorated for some time before it triggered last fall's classic
crash. After a bounce, the crash extended into March when a natural rebound
began.

After the panic, the rebound could run for some six months and September was
the sixth month. On the equivalent in 1930, Barron's noted that "the
urge to speculate is as speculative as ever" and concluded that it
would be difficult to "quench the fires of enthusiasm". On that
rebound, the Dow retraced 50 percent of the loss.

This time, the Dow has recovered 44 percent of the loss and the Nasdag 56
percent - both with wonderful enthusiasm, which is now measurable. Sentiment
got to 92 Percent Bulls in September and this compares to 88 Percent Bulls
at the peak of the market in October 2007.

For those whose dwell in GPD-Land, that peak is very important. At normal
peaks, the cycle for stock certificates leads the peak in business activity
by some 12 months. For example, the Dot-Com peak was in March 2000 and the
NBER determined that it officially started in March of 2001.

The only times the peaks have been coincidental has been at the climax of
a great financial mania.

For those who appreciate official numbers, in 1873 the crash began in mid
September and the NBER determined that the recession started that October.
In 1929, as everyone knows, the crash began in mid-September and the NBER date
was set as that fateful August.

This time around, the stock market high was set in the latter part of October
2007 and the NBER date was that fateful December - close enough to fit the
model of the transition from a Great Bubble to a Great Depression. Within which,
an important step is the establishment claiming that the worst is over. There
have been a number of those in September. Going back a few generations, on
September 12, 1930, then Secretary of Labor, James J. Davis, announced "we
are on the upswing". The Harvard Economic Society made similar announcements
throughout most of 1930.

Other than missing the collapse of speculation, the establishment has made
a serious blunder in the worst financial storm since the 1930s. Those who should
have been more logical stated that it was not another depression - because
unemployment was not at 25 percent. That horrible figure wasn't reached until
1933. In 1930 when the Secretary of Labor was on the "upswing", unemployment
was around 9 percent, as it is lately.

It is prudent to make logical comparisons, and the main intellectual problems
with economic interventionists are essentially the same for interventionists
in climate control.

The quickest one to deal with is the simple failure in logic. A primitive
syllogism is the description of the popular compulsion to conclude that because
two things occur at the same time, they are causally linked.

Yeah - roosters crowing in the morning cause the sun to rise.

Yeah - credit does expand with increasing business activity, but there is
no causal link. And to claim that an artificial increase in credit - think
stimulation - will cause an economic expansion is something only a very egotistical
rooster would fall for.

Unfortunately, much the same holds in the man-caused global warming movement.

You can visualize this one. Some post-hippie Greenpeacer is tired of knocking
on doors to save the whales and notices that physicists have assembled a climate
history. Then still angry about "dark satanic mills" he looks at the increase
in temps since the 1800s and declares that industrial progress causes global
warming. Eventually real earth scientists began to notice the promotion and
said "So what - it's been warming for 12,000 years". The promotion
then became "Climate Change" and the sweep of accusation quickly included cars
and - shudder - oil companies.

Beyond the primitive syllogism, the parable includes the other main blunder
by ambitious central planners, which is best described by an old saying in
physics: "If you keep your data base short enough, it will fit your theory".

This is the case in economics where interventionists consider that the Fed
is the perfect policy system. To maintain the image they have to accuse those
running it in 1929 of being "too tight". The old ad hominem attack.

Most academics, such as Bernanke can't get out of the early part of the 1900s,
and they overlook the fact that the Fed was trying to reflate. In July 1932,
Barron's concluded that:

"The Federal Reserve policy of cheapening credit through the purchase
of government bonds has been unable to make a dent in the conservatism
of borrower or bank lender, in short, every anti-deflationary effort has
yet to provide positive results. The depression is sucking more and more
bonds into its vortex."

I have found the best way to counter the debate about the blunders made by
Fed personnel in the post-1929 debacle is to ask the interventionist to explain
the similar transition in 1873, when the existing treasury system and fiat
currency was touted as proof against anything going wrong.

Much the same holds for the five bubble transitions from 1720 to 1929, or
for that matter the prototype failure that began in 1618. That one prompted
an early example of some intellectual imagining that throwing credit at a contraction
would make it go away. The big scheme that failed involved heavy commitment
by the government and veteran merchants described the venture as a sepulcher "Attractive
without, dead bones within."

Policymakers threw credit at the markets in 2007 and even more aggressively
in 2008 and yet a classic crash happened. This made them really aggressive
through this year and we have enjoyed a classic rebound in the markets and
in business activity. This has done little to change the usual sequence of
transitional events.

In the last few weeks, credit markets have taken a modest step towards adversity
that could be signaling caution to highly speculative stock and corporate bond
markets. The employment of leverage in the carry trade is again immense and
it is worth keeping in mind that the Fed has no influence upon the curve or
spreads. The speculative excesses of the August and September will have to
be corrected and if the decline becomes severe it will likely take business
activity with it. New lows will devastate both practicing and academic interventionists.
Recall that in December 2007, Gregory Mankiw boasted that government policy
advisors included the "dream team" of economists. Nothing could
go wrong.

It did with the most significant crash since the 1930s.

This is also the case with the intense speculation in climate change. It is
changing to down, with a temperature drop of about three-quarters of the previous
rise that so agitated the alarmers. An important contributor to recent high
temperatures has been that the sun was at its most active in over a thousand
years (Zurich Institute for Astronomy, 2004).

This, as the saying goes, is in the market, and for some years solar activity
has been diminishing. On the usual 11-year period, Solar Cycle 23 was likely
to bottom in late 2006 or early 2007 and it did decline to then - and kept
right on going. This is now the deepest solar minimum since 1913, and to some
researchers - predictable. For most alarmers, and at the risk of a pun, it
has been right over their heads.

It is coincidental that the bottom fell out of the Sun at almost the same
time as credit markets turned south. It is very timely.

Now we get to science at its best and conventional hysteria at its worst.

Two astronomers at Tucson, Livingston and Penn, with data beginning in 1992,
concluded that the magnetic strength and area of sunspots were "greatly
diminished". What's more, this is on a "linear trend independent
of the solar cycle".

Obviously serious stuff, and as it was working out, four years ago they published
a draft paper on declining sunspots and immediately a couple of propagandists
got on the bandwagon by claiming it would add to global warming.

When the left is on a tear - watch out - they get nasty. Despite that one
of the features of science has always been skepticism, academics have lost
tenure for questioning anything about the message, and meteorologists have
been fired for asking the wrong questions.

Even "experts" from other disciplines or even no discipline have used bullying
for persuasion. Dr. David Suzuki is a Zoologist and Canada's equivalent to
Al Gore. In whipping up a crowd in 2008, he exhorted them to "find a
legal way of throwing our leaders into jail" because not acting upon
climate change was an "intergenerational crime".

In June, Nobel economist Paul Krugman, condemned deniers "I was watching
a form of treason - treason against the planet."

One of the dangers in non-science propaganda is reliance upon authority or
consensus. The UN's IPCC still insists that "the science is settled",
as does Al Gore who will not meet with or debate anyone on the skeptical side.
With cooling temps Mother Nature is winning the debate.

Indeed, attempts to stifle skepticism have been massive and remind of the
Vatican's stifling of Galileo. His message was science; his nemesis was Jesuit
astronomers fixed upon authority. In their case the main one was 1 Chronicles
16:30 that instructed "The world is firmly established, it cannot be
moved."

In following that authority, they had to contrive very elaborate models to
explain motions in the solar system. As data accumulated on planetary motion
Vatican astronomers were fully employed keeping their preposterous "models" up
to date. They had a lot of turf to defend and Galileo threatened their status
and comfort.

Real science was put on hold and this is the case now, as climate experts
put global warming into their "models" and global warming comes out.

Eventually, the path of science resumed and other than Luddite riots that
accompanied the start of industrialization, there has been no significant anti-science
movement until today's climate control freaks.

If you don't mind I'll cover some personal points. I completed a single degree
in Geophysics in 1962 and after one winter in the bush I sought indoor employment
with no heavy lifting. And found it with Canada's largest bond underwriter.
As a trainee I knew nothing, but did have the nerve to ask the VP of underwriting
about inflation getting above 2 percent and its affect upon the coupon and
principle. The answer was that inflation only occurred in lesser countries
in Europe or South America. Governments in Canada and the U.S. had too much
integrity to succumb to depreciation.

Pension funds were full of bonds just as the greatest bond bear market was
getting underway.

Flash forward to 2008 when pension funds had become convinced that depreciation
was the way of the land. They could count on sound money being banished forever
and they loaded up on commodities. Pension funds were forced to abandon probity
and term matching because policymaking had become corrupt, with no redemption
in sight.

In the early 1960s, the subject of recurring ice ages and interglacials was
strongly debated. Some lectured that an ice age needed huge amounts of precipitation
in the form of snow and this required ocean circulation through an open Bering
Strait. Others lectured that Milankovitch temperature periodicity based upon
changes in the Earth's orbit made the most sense.

There was very little temperature history so no definite conclusions could
be made. In the late 1960s data started to accumulate and has continued - it
confirms periodicity. Variation in solar output of energy has long been implied
by variation in sunspot activity and then recorded by satellite measure. The
Sun's behaviour is periodic and is on a noticeable downtrend that is inconvenient
to warming hysteria.

Time doesn't permit full detailing of the scientific errors, misconceptions,
data distortions and omissions essential to the promotion. But it can be researched
at a number of reputable sites. Friends of Science is one that I support.

As with the adoption of Keynesian economics, that the nonsense of man-caused
warming has been at the forefront is that the promotion transfers huge amount
of money and power to the state.

Reid Bryson has been considered as the father of scientific climatology and
he observed: "If you want to be an eminent scientist, you have to have
a lot of grad students and a lot of grants. You can't get grants unless you
say, 'Oh, global warming, yes, yes, carbon dioxide.' "

Hillary Clinton used the financial disaster to advance alarmism by advising "Never
let a crisis go to waste."

The late 1700s and early 1800s was also a time of intense political ambition
and inflation. On the associated corruption, Goethe dryly observed "Most
men only care for science so far as they get a living by it, but they will
worship error when it affords them a subsistence."

The trading floor of the old and notorious Vancouver Stock Exchange is long
gone, but its definition of a promotion is ageless.

"In the beginning, the promoter has the vision and the public has the
money.

At the end of the promotion, the promoter has the money and the public
has the vision."

In 1900 all levels of government were taking around 5 percent of GDP. Now
the ambition is to take it all over.

Interventionist economics only serves the state and its limitation has always
been the silly notion about a national economy. Interventionist climate control
mainly serves control freaks and their ambition is global. Their schedule of
alarmist meetings is intended to create a one-world-government. It will be
authoritarian, and the Copenhagen Climate Summit in December has within its
agenda wording about one-world-government.

It could be the movement's Waterloo. Why?

Globally, the rate they are going through them there will soon be a shortage
of lies. Why soon? They are already out of half-truths.

By way of concluding this address, another saying from the old VSE is instructive:

"So long as the price is going up, the public will ardently believe
the most preposterous story." Then when it breaks the suspension
of belief fails and is replaced by shock, remorse and chagrin.

This has been the case with interventionist economics since 2007, and the
remarkable plunge in solar activity and very timely decline in temps is severely
impairing alarmist promotions. It is beginning to force some scientists with
a regard for their reputation to climb off the bandwagon.

The Sixteenth Century was mentioned in my opening comments. This was one of
three Tyrannical Centuries within which the authoritarian movement used a number
of superstitions and icons to extend power. Fortunately in England, this blew
out with the rate of inflation in the early 1600s and what followed has been
called the "Protestant Reformation".

This description is too narrow and it could be called the "Great Reformation",
whereby once the spell of authoritarianism had lost momentum, all social institutions
were critically examined by the public. Those that assisted repression were
dumped or diminished in influence. In science, superstitions employed by the
state such as Astrology and Alchemy evolved into Astronomy and Chemistry.

Today's superstition about managing the economy is really another form of
alchemy, which along with the promotion of climate change, will be soon assigned
to the "dustbin of history".

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
guarantee its accuracy or completeness. This research report is prepared for
general circulation and is circulated for general information only. It does
not have regard to the specific investment objectives, financial situation
and the particular needs of any specific person who may receive this report.
Investors should seek financial advice regarding the appropriateness of investing
in any securities or investment strategies discussed or recommended in this
report and should understand that statements regarding future prospects may
not be realized. Investors should note that income from such securities, if
any, may fluctuate and that each security's price or value may rise or fall.
Accordingly, investors may receive back less than originally invested. Past
performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes
an offer to buy or sell any securities or options or futures contracts. Foreign
currency rates of exchange may adversely affect the value, price or income
of any security or related investment mentioned in this report. In addition,
investors in securities such as ADRs, whose values are influenced by the currency
of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional
Advisors team may be long or short positions discussed in our publications.